Deck 10: Savings for Distant Goals: Retirement and Education Funding

Question 1

Which of the following is the first step of the seven basic steps to estimate how much you need to save to achieve your retirement goals?

A) Estimating retirement expenses
B) Estimating income from Social Security
C) Calculating income shortfall for first year of retirement
D) Estimating monthly savings required to meet savings goal

Answer 1

Estimating retirement expenses

Question 2

As with other types of financial planning, the last step in retirement and education planning is to

A) monitor your progress and revise your plan as needed.
B) implement your retirement and education plan.
C) decide on the best retirement and education plan.
D) identify your retirement and education needs.

Answer 2

monitor your progress and revise your plan as needed.

Question 3

When developing your retirement plan, after you have estimated the additional savings needed to achieve your funding goals, what should you do next?

A) Find tax-efficient strategies for savings.
B) Implement the funding and savings plan.
C) Evaluate your progress and revise if needed.
D) Find any discounts offered by different plans and agencies.

Answer 3

Find tax-efficient strategies for savings.

Question 4

When developing a plan for retirement and/or education savings and funding, you should always reevaluate your needs

A) after every step of the planning process.
B) on a regular basis.
C) when emergencies develop.
D) when you graduate college.

Question 5

Retirement needs tend to be

A) the same for everyone.
B) based on an individual's Social Security benefits.
C) based on age.
D) different for everyone.

Question 6

The younger you retire, the __________ your retirement period and the __________ time you have to accumulate wealth.

A) shorter; longer
B) longer; shorter
C) shorter; shorter
D) longer; longer

Question 7

The most common retirement age is __.

A) 59
B) 60
C) 65
D) 67

Question 8

Which is not one of the steps in estimating how much you need to save to achieve your retirement goals?

A) Estimating expected inheritance
B) Estimating expected income from employer defined-benefit pension plan(s)
C) Using time value of money calculations to estimate the total retirement wealth you'll need to have saved by the time you retire to cover your income shortfall
D) Estimating the present value of any current retirement savings you have accumulated

Question 9

The replacement ratio method for estimating retirement expenses assumes retirement expenses will often be _____ percent of preretirement expenses.

A) 50 to 60
B) 60 to 70
C) 70 to 80
D) 80 to 90

Question 10

Joe's expenses are about $3,500 per month. Use the replacement ratio method to estimate his annual retirement expenses.

A) $10,000 to $12,000
B) $21,000 to $25,200
C) $29,400 to $33,600
D) $42,000 to $46,200

Question 11

The replacement ratio method is considered ________ method than the adjusted expense method, when estimating retirement income needs.

A) a more accurate
B) a less accurate
C) a more uncommon
D) a more complex

Question 12

Of the methods commonly used for estimating retirement expenses, the _________ method takes more time to forecast but results in a more accurate forecast.

A) adjusted expense
B) replacement ratio
C) defined-benefit
D) inflation-adjusted

Question 13

Which is a common reason that most people retire at age 65?

A) Minimum age for Social Security
B) Minimum age for Medicare
C) Minimum age for Medicaid
D) Minimum age for Social Security and Medicaid

Question 14

The adjusted expense method is used to estimate

A) pretax retirement income needs in future dollars by adjusting current expenses for changes expected in retirement.
B) after-tax retirement income needs in future dollars by adjusting current expenses for changes expected in retirement.
C) after-tax retirement income needs in current dollars by adjusting current expenses for changes expected in retirement.
D) after-tax retirement income needs in current dollars by multiplying current expenses by a factor of 70 to 80 percent.

Question 15

If you expect to retire in 25 years and have estimated that you will need $45,000 per year in today's dollars, how much will you need in the first year of retirement assuming a 5% average inflation rate?

A) $152,386
B) $154,670
C) $155,853
D) $156,658

Question 16

If your current expenses are $55,000 a year today, using the replacement ratio method of estimating retirement expenses, what is the minimum income you would need 40 years from now, assuming inflation is 2.5%?

A) $103,375
B) $118,143
C) $132,911
D) $147,679

Question 17

Janet Arbuckle has decided that she only needs $30,000 per year to live a comfortable life in today's dollars. In talking to her financial advisor, she forecasts 3% inflation in the long run. Janet wants to retire 20 years from now, and she has calculated her first-year retirement needs will be about $72,000 in future dollars. Is she correct? Why?

A) Yes, adjusting for inflation, $30,000 will be worth approximately $72,000 in 20 years.
B) No, adjusting for inflation, $30,000 will be worth approximately $39,000 in 20 years.
C) No, adjusting for inflation, $30,000 will be worth approximately $31,800 in 20 years
D) No, adjusting for inflation, $30,000 will be worth approximately $54,000 in 20 years.

Question 18

Carlos has estimated that he will need about $145,650 in the first year of retirement (adjusted for inflation), but his wife is worried about being taxed on this income. Assuming they will pay 28% average tax rate, how much do they need to generate in pretax income for their first year's expenses?

A) $202,292
B) $186,432
C) $104,868
D) $113,789

Question 19

In order to estimate your retirement income shortfall in the first year of retirement, you need to subtract your expected employer pension plan income from your before-tax income needs in your first year of retirement and then ________ the expected Social Security benefits.

A) subtract
B) add
C) multiply
D) divide

Question 20

Gloria has calculated that she needs $50,000 her first year of retirement to maintain her standard of living. She expects to receive $1,000 per month from her employer defined-benefit pension and $1,500 per month from Social Security. What is her annual retirement income shortfall?

A) $15,000
B) $20,000
C) $32,000
D) $50,000

Question 21

You expect your expenses in the first year of retirement to be $70,000. Your return on investment is 7%. Assuming you are willing to spend down both principal and interest, how much retirement wealth will you need to have accumulated by the time you retire to be able to pay for 20 years of retirement expenses that increase at an average rate of 4%? (Select the closest answer.)

A) $500,000
B) $750,000
C) $1,000,000
D) $1,250,000

Question 22

Assume that you have estimated your retirement wealth needed to be $1,000,000, based on a 7 percent investment return, 4 percent inflation during retirement, and 20 years of retirement. If inflation turns out to average less than 4 percent per year during retirement, what will be the effect on your retirement wealth needed?

A) You will need less than estimated.
B) You will need more than estimated
C) You will need the same amount as estimated.
D) There is not enough information to answer the question.

Question 23

Assume that your retirement income shortfall is $10,000 per year, increasing at 4% per year. You expect to live 30 years in retirement and earn an average rate of return of 6% on your investments. If you plan to use both principal and interest to fund your income needs, your savings goal would be closest to (select the closest answer)

A) $10,000.
B) $200,000.
C) $500,000.
D) $2,000,000.

Question 24

Lucas plans to retire in 15 years. His current household expenses are $75,000 per year. He estimates that when he retires, he will no longer have $3,600 in monthly mortgage payments, $5,000 in annual commuting expenses, and $12,000 in annual budgeted 401(k) contributions. However, he does expect that his health-care costs will rise by $3,700 per year and his entertainment expenses to total $8,000 each year. What will be his estimated retirement expenses, in today's dollars, if using the adjusted expense method?

A) $18,550
B) $26,500
C) $52,500
D) $60,000

Question 25

Carlos plans to retire next year. His current household expenses are $85,000 per year. He estimates that when he retires, he will no longer have $3,600 in monthly mortgage payments, $5,000 in annual commuting expenses, and $12,000 in budgeted 401(k) contributions. However, he does expect that his health-care costs will rise by $12,000 and his entertainment expenses to total $38,000 each year. He expects to receive $65,000 annually from his 401(k) and $28,800 in annual Social Security benefits. If he pays an average tax rate of 24%, what will be his estimated retirement income shortfall, if using the adjusted expense method?

A) $3,288 income surplus
B) $19,000 income surplus
C) $3,512 income shortfall
D) $3,288 income shortfall

Question 26

The term used by economists to describe the tendency of people to overemphasize short-term goals and outcomes is called

A) myopia.
B) short ethos.
C) average focus.
D) avoidance.

Question 27

If Jack Miller were to underestimate the effects of inflation on his retirement income, his standard of living in retirement could consistently__________ as he gets older.

A) increase
B) decline
C) stay the same
D) improve

Question 28

Life expectancy charts suggest that a 50-year-old woman will live to be 83 years old. If a 50-year woman uses this information to plan for her retirement, she is guilty of

A) myopia.
B) ignoring inflation.
C) focusing on averages.
D) being overly optimistic.

Question 29

The three-legged stool of retirement is a metaphor for retirees suggesting that retirement be funded by three sources: employer-sponsored retirement plans, Social Security, and

A) earned income.
B) inheritance.
C) personal savings.
D) investment income.

Question 30

If the three-legged stool of retirement income relies too heavily on only one leg, it will be wobbly and will not provide reliable and stable retirement income. Which leg is currently providing insufficient retirement income for most households?

A) Private savings
B) Social Security
C) Employer retirement plans
D) Earnings

Question 31

To achieve the greatest level of retirement security, you should plan on multiple sources of retirement income including

A) employer-sponsored retirement plans.
B) Social Security.
C) personal savings.
D) All of these sources.

Question 32

Social Security provides about _____ of all income for households whose members are age 65 and over.

A) a quarter
B) a third
C) half
D) two-thirds

Question 33

If your company retirement plan considers how long you have worked for the company and your final salary in determining your retirement benefit from the plan, you have a

A) defined-contribution plan.
B) defined-benefit plan.
C) individual retirement plan.
D) independent retirement plan.

Question 34

Brenda has been working for BestMart, Inc. for 35 years. She currently earns $97,000 a year and is fully vested in the pension plan. Her employer uses the following benefit formula: 1.5% of final salary for each year of service up to a maximum of 70%. If she were to retire today, what will be her annual pension benefit?

A) $16,975
B) $50,925
C) $67,900
D) $97,000

Question 35

A retiree's future benefit from an employer-sponsored defined-contribution plan is usually based on

A) a formula taking into account number of years of service and average earnings.
B) a formula taking into account number of years of service and final earnings.
C) how much is contributed each year and the rate of return on invested assets for many years into the future.
D) how much is contributed each year and the number of years of service.

Question 36

Social Security is a type of

A) defined-contribution plan.
B) defined-benefit plan.
C) welfare plan.
D) savings plan.

Question 37

Delaying social security benefits is a good strategy for maximizing retirement income. By choosing not to begin receiving benefits at the normal retirement age of 67, a participant's benefits will increase by ____ percent for each year of delay up to age 70.

A) 1
B) 1.45
C) 6.2
D) 8

Question 38

Which payroll tax is only charged on income up to a maximum cap?

A) Medicaid
B) Social Security
C) Medicare
D) Affordable Care Act

Question 39

In the computation of your Social Security benefit, average indexed monthly earnings (AIME) refers to the average of your

A) 35 years of highest monthly earnings.
B) 35 years of highest monthly earnings, adjusted for wage inflation.
C) 35 years of lowest monthly earnings, adjusted for wage inflation.
D) monthly earnings throughout your working career, adjusted for wage inflation.

Question 40

Sandra reached full retirement age in 2016, and her average indexed monthly earnings (AIME) are $3,000. Her Social Security primary insurance amount (PIA) will be _____ of her AIME.

A) more than 90 percent
B) between 32 percent and 90 percent
C) between 15 percent and 32 percent
D) less than 15 percent

Question 41

Renee and her husband Jason have been married for 25 years and are planning to retire this year. Jason's PIA is $2,000. Renee's PIA is $800. Assuming they are both at full retirement age, what is their maximum joint retirement benefit under Social Security?

A) $2,000
B) $2,800
C) $3,000
D) $4,000

Question 42

To be "fully insured" under the Social Security program,

A) you must have earned at least a specified minimum dollar amount for 40 three-month periods.
B) you must be at least age 60.
C) you must be a naturalized citizen.
D) All of the above.

Question 43

A divorced woman can receive Social Security benefits based on her ex-husband's Social Security earnings even if he dies, as long as the marriage lasted at least how many years?

A) 1 year
B) 3 years
C) 10 years
D) There is no time limit.

Question 44

Social Security benefits are ______ for inflation annually, which ensures that a retiree's purchasing power will not decline over time.

A) adjusted higher
B) adjusted higher or lower
C) not adjusted
D) reduced

Question 45

Which of the following is not one the causes of the projected insolvency of Social Security?

A) Higher incomes lead to higher benefits.
B) People are living longer.
C) The baby boom generation is larger than the generation following it.
D) All of these options are considered potential causes.

Question 46

When compared to married couple retirement households, single retirees have ________ the household income.

A) less than half
B) less than one-third
C) double
D) relatively the same

Question 47

Carla and Ben have been married for 50 years. During that time, Carla stayed home raising their children and maintaining their household while Ben worked for an engineering firm. When they reach retirement age, together Ben and Carla are eligible to receive

A) 150 percent of Ben's Social Security benefits.
B) half of Ben's Social Security benefits.
C) only Ben's Social Security benefits.
D) 200 percent of Ben's Social Security benefits.

Question 48

Social Security benefits are based on the ________, which is the top 35 years of earnings (up to the taxable maximum for each year), adjusted for wage inflation to current-year dollars.

A) average indexed monthly earnings (AIME)
B) primary insurance amount (PIA)
C) three-legged stool of retirement method
D) same formula used by DB plans

Question 49

The ________ is the monthly benefit you would be entitled to if you retired at the normal retirement age.

A) primary insurance amount
B) average indexed monthly earning
C) three-legged stool of retirement
D) SSA wage calendar

Question 50

The calculation used by Social Security to calculate retirement benefits is meant to replace a(n) _________ of preretirement income for low-income retirees than for high-income retirees.

A) larger percentage
B) smaller percentage
C) equal amount
D) equal percentage

Question 51

Social Security is a(n) ________ system.

A) pay-as-you-go
B) delayed benefits
C) accumulated value
D) incongruent

Question 52

What happens when the total payroll taxes collected for Social Security exceed the total being paid out in benefits to current retirees?

A) The SSA invests the excess in special-issue government bonds.
B) The SSA distributes the excess to the lowest-earning beneficiaries.
C) The SSA returns the excess as tax refunds.
D) The SSA uses the funds to invest in U.S. Series EE bonds.

Question 53

Experts agree that some sort of Social Security reform will be necessary in the future as the baby-boom generation continues to age. Which of the following would not help improve the solvency of the program?

A) Raising the retirement age
B) Limiting benefit increases in the future
C) Lowering the retirement age
D) Reducing the replacement percentages in the PIA formula

Question 54

Which future change in the Social Security system is most likely as part of Social Security reform?

A) Raising the retirement age
B) Increasing benefits for the wealthy
C) Eliminating the program
D) Lowering taxes on the wealthy

Question 55

John was born in 1985; what is his normal retirement age?

A) 62 years
B) 65 years
C) 67 years
D) 70 years

Question 56

The contribution limit for a Roth IRA is ______ the traditional IRA.

A) less than
B) more than
C) equal to
D) different than

Question 57

Contributions to a traditional IRA are tax _______ and withdrawals in retirement are taxed as _______ income.

A) free; ordinary
B) deductible; ordinary
C) free; long-term capital gain
D) deductible; long-term capital gain

Question 58

Which of the following is a difference between traditional IRAs and Roth IRAs?

A) Deductibility of contributions
B) Age at which you can begin contributing to an account
C) Amount you can contribute
D) Penalty for early withdrawal of earnings

Question 59

Roth IRAs

A) allow pretax contributions and deferral of taxation on investment earnings.
B) allow pretax contributions and early withdrawal for first-time home purchases.
C) must be funded with after-tax contributions but contributions can be withdrawn at retirement tax-free.
D) have lower income limitations than traditional deductible IRAs.

Question 60

Which of the following types of investments do not require you to pay taxes on investment earnings until withdrawal?

A) Traditional IRAs
B) 401(k) defined-contribution retirement plans
C) Annuities
D) All of the above.

Question 61

Which retirement account has contribution limits based on participation in an employer's retirement plan?

A) Roth IRA
B) Traditional IRA
C) Variable annuity
D) Joint and survivor annuity

Question 62

A ________ annuity pays a married couple a benefit until the second spouse dies.

A) joint and survivor
B) variable
C) deferred
D) permanent

Question 63

________ are subject to regulations that resemble those of defined-contribution plans offered by employers.

A) Traditional IRAs
B) Roth IRAs
C) Taxable accounts
D) Annuities

Question 64

Evan works for an employer that does not provide a retirement plan as a benefit. He earns $175,000 per year. He plans to fund his own retirement account through his local bank. Which of the following would best suit Evan?

A) A traditional IRA
B) A Roth IRA
C) A taxable account
D) An annuity

Question 65

Jeff, a 56-year-old professor, is subject to a 28% marginal tax rate. He has a family emergency and must withdraw $5,000 from his traditional IRA to fund it. How much money will he owe the government for this withdrawal?

A) $140
B) $1,400
C) $500
D) $1,900

Question 66

Bill wishes to take a deduction for a $6,000 contribution to his traditional IRA. When is the deadline to fund his traditional IRA in order to take the income tax deduction for 2019?

A) December 31, 2019
B) January 1, 2020
C) January 31, 2020
D) April 15, 2020

Question 67

What is the catch-up contribution limit for individuals age 50 and over for Roth IRAs?

A) $500
B) $1,000
C) $1,500
D) $2,000

Question 68

Along with an early investment start, ________ make(s) a big difference in your accumulated retirement wealth.

A) the rate of return on investments
B) the tax rate on investments
C) contribution limits on investments
D) the present value of investments

Question 69

Annuities are a recommended means of retirement income because they can provide

A) tax-free income.
B) tax-deferred growth and income.
C) lifetime income and thus reduce the risk of outliving retirement assets.
D) tax-deductibility of contributions and tax-deferred growth.

Question 70

As with life insurance, the pricing on life annuities depends on

A) life expectancy.
B) current income.
C) income replacement and financial obligations.
D) individual risk characteristics.

Question 71

Marnie and John have a joint and survivor annuity. This means that

A) the annuity pays a benefit until the second spouse dies.
B) the annuity pays a double benefit for their entire lives.
C) the annuity pays a benefit until the first spouse dies.
D) only the beneficiaries receive a benefit after both Marnie and John die.

Question 72

If you opt for a joint and survivor annuity, you are entitled to receive a series of equal payments to

A) you and your spouse until the first one dies.
B) you and your spouse until the last one dies.
C) you and your spouse during the life of both, with the remainder going to your children.
D) you, your spouse, and your children until the last person dies.

Question 73

Travis has purchased an annuity to help offset the cost of retirement and reduce the likelihood that he will outlive his other benefits. He is guaranteed an immediate income benefit of $2,000 per month, which means he has a ________ annuity.

A) fixed
B) variable
C) deferred
D) joint

Question 74

Reverse annuity mortgages work by turning ________ into cash flow.

A) home equity
B) IRAs
C) defined benefits
D) deferred annuities

Question 75

Many people approach what they originally imagined would be their retirement age but discover that they can't afford to retire yet. Which of the following strategies would make the situation worse?

A) Continuing to work
B) Reducing expenses
C) Taking out a second mortgage
D) Increasing savings rate while still working

Question 76

In recent years, the rise in college tuition has _______ the rate of inflation.

A) been slightly lower than
B) been slightly higher than
C) greatly outpaced
D) nearly matched

Question 77

Which accounts allow pretax contributions of $2,000 per year and tax-free withdrawals for qualified education expenses?

A) Traditional IRAs
B) Roth IRAs
C) Coverdell Education Savings Accounts
D) Annuities

Question 78

Parents can save for their children's education with a Coverdell Education Savings Account, a savings arrangement that allows

A) after-tax contributions of $2,000 per year per child and tax-free withdrawals.
B) after-tax contributions of $5,000 per year per child and tax-free withdrawals.
C) pretax contributions of $2,000 per year per child and tax-free withdrawals.
D) pretax contributions of $5,000 per year per child and tax-free withdrawals.

Question 79

A Section 529 plan is a(n)

A) tax-deductible prepaid tuition plan.
B) after-tax higher education savings plan.
C) state-sponsored, after-tax prepaid tuition plan or a higher education savings plan.
D) federally sponsored after-tax higher education savings plan.

Question 80

The benefit of a Section 529 plan is a

A) federal income tax credit.
B) federal income tax deduction.
C) tax savings on investment earnings.
D) reimbursement of tuition costs.